Schroder Exempt Property Unit Trust

Transcription

1 SEPUT Annual Report 2012 Cover_ SEPUT Annual Report 2012 Cover 25/06/ :12 Page 2 31 March 2012 Schroder Exempt Property Unit Trust ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS 31 March 2012 Schroders Exempt Property Unit Trust 31 Gresham Street, London EC2V 7QA Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements

2 SEPUT Annual Report 2012 Cover_ SEPUT Annual Report 2012 Cover 25/06/ :12 Page 3 Schroder Exempt Property Unit Trust ( SEPUT or the Trust ) was established in 1971 as an open ended property unit trust under UK law. The investment objective of the Trust is to achieve a blend of income and capital growth for investors through investment in UK property. Risk is diversified by the Trust holding a mixed portfolio of retail, office, industrial and other property throughout the UK. The Trust may also hold land and undertake developments as well as use moderate levels of gearing from time to time. Front cover: Mermaid Quay, Cardiff Investment Objective and Policy The Trust seeks to provide a return of 0.5% per annum (net of fees) above its benchmark (Investment Property Databank UK Pooled Property Fund Indices All Balanced Funds Median) over rolling three year periods. The Trust may be suitable for UK tax exempt pension funds and charities who wish to hold a direct property portfolio without the commitment of considerable trustee oversight and management expertise. The property in the Trust is professionally and actively managed by chartered surveyors employed by the Property Manager, Schroder Property Investment Management Limited. The Manager welcomes the opportunity to meet unitholders, potential unitholders and their advisers to explain more fully the strategy and progress of the Trust. Please see Manager Contacts on page 39. Schroder Exempt Property Unit Trust Schroder Property Investment Management Limited 31 Gresham Street London EC2V 7QA Tel: +44 (0) Further information can be found on the website

3 Contents REPORTS FINANCIAL STATEMENTS Trust Analysis Chairman s Statement Manager s Statement Rent Reviews, Lettings and Lease Renewals Purchases and Sales Portfolio Details Responsibilities of the Manager, Trustee and Supervisory Board Independent Valuer s Report Independent Auditor s Report Statement of Net Assets Income and Expenditure Account Statement of Total Recognised Gains and Losses Cash Flow Statement Notes to the Financial Statements Supervisory Board and Key Service Providers Additional Unitholder Information General Information 01

4 Trust Analysis Size and Net Asset Value per Unit During the year the Net Asset Value (NAV) of the Trust increased by 12.1 million, to 1,248.2 million at 31 March 2012 from 1,236.1 million at 31 March The Trust s NAV per unit was at 31 March 2012, compared to at 31 March 2011, an increase of 2.1%. Active Management Over the twelve months to 31 March 2012, 13 rent reviews were settled at an average of 15.6% above the old passing rent, and 9.4% above estimated rental value. 40 new lettings were completed over the last twelve months, contracting an additional 5.9 million of income. Total Returns Performance % to 31 March year (% per annum) 2 years (% per annum) 3 years (% per annum) 5 years (% per annum) 10 years (% per annum) Twelve month performance % to 31 March Trust Benchmark* IPD UK Pooled Property Fund Indices - All Balanced Funds Index Weighted Average Source: Investment Property Databank (IPD) UK Pooled Property Fund Indices. Performance is calculated on a Net Asset Value (NAV) to NAV price basis plus income distributions accrued for the relevant periods, compounded monthly, net of fees and based on an unrounded NAV per unit. * Benchmark shown is the IPD UK Pooled Property Fund Indices All Balanced Funds Index Median. The Trust benchmark has changed over time and a composite for 10 years is available upon request. The Weighted Average is shown for illustration purposes and is used for detailed analysis of the Trust s property portfolio as the Median does not provide appropriate detail. 02 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

5 Portfolio by Sector At 31 March 2012 Overweight/underweight relative to benchmark* -5.2% -4.0% -1.7% 0.6% 3.4% 7.6% Absolute Segment SEPUT Benchmark* Standard Retail South East Standard Retail Rest of UK Shopping Centres Retail Warehouses Offices Central London Offices South East % -2.2% -2.7% 1.1% 8.7% Offices Rest of UK Industrial South East Industrial Rest of UK Other Cash Underweight Overweight Source: IPD and Schroders, 31 March 2012 * Positions relative to IPD UK Pooled Property Fund Indices All Balanced Funds Weighted Average. The weighted average has been used as this level of information is not available in the median. Relative positions are measured on a GAV (Gross Asset Value) basis. Data may be subject to rounding. Portfolio Profile At 31 March At 31 March Gearing (% NAV)* 6.1% 6.9% Average unexpired lease length** 7.4 years 7.6 years Void rate*** 7.6% 6.7% Benchmark void rate*** 7.8% 8.0% Size of Trust (NAV) 1,248.2m 1,236.1m NAV per unit Gross annual distribution Distribution yield**** 4.1% 4.1% Source: Schroders 31 March 2012 * NAV: net asset value. ** To first break or expiry, whichever is sooner. *** Expressed as a % of open market rental value. **** Total distributions paid per unit over last 12 months, divided by latest NAV per unit. 03

6 Trust Analysis (continued) Top Ten Holdings 31 March 2012 Holdings Sector % NAV* Bracknell Retail and Office 5.5 London W4, Building 8, Chiswick Park Offices 4.4 York, Monks Cross Retail Warehouse 4.1 Crayford, Acorn Industrial Estate Industrial 3.8 London NW10, Matrix, Park Royal Industrial 3.6 Cardiff, Mermaid Quay Other: Leisure 3.6 Reading, Davidson House Offices 3.4 Manchester, Fujitsu, Central Park Office 3.3 London WC2, Parker Tower Offices 3.2 London W14, Kensington Village Offices 3.1 Source: Schroders, 31 March 2012 * NAV: net asset value Top Ten Tenants 31 March 2012 Tenant m Contracted Rent* % Contracted Rent* Fujitsu Services Limited Lloyds TSB Bank Plc QVC Ltd British Telecommunications PLC Exel Ltd Regus (UK) Limited Pendragon PLC B&Q Plc Sungard Availability Services (UK) Ltd Universal Music Operations Limited Source: Schroders, 31 March 2012 * The rental amount to be paid as defined by the lease. 04 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

7 Chairman s Statement Overview The Trust has been significantly repositioned over the last three years from the market lows in The majority of the portfolio is now invested in good quality direct real estate which appeals to today s occupiers. This repositioning has been done in a challenging environment where concerns over sovereign debt in the eurozone and limited economic growth continue to weigh heavily on investment markets. Against that background, the Trust has outperformed the benchmark over the one and two year periods to 31 March 2012 as can be seen on the tables on page 2 and it has consistently performed in line or ahead of the benchmark for the last eight quarters. In the current economic climate the quality of the portfolio and the security of the income stream are essential to continue delivering relative outperformance and are central to the Trust s investment strategy. The repositioning of the portfolio puts the Trust in a much stronger position to withstand any further deterioration in the UK economy. Net Asset Value and Performance I am pleased to report that over the 12 months to 31 March 2012, the Net Asset Value ( NAV ) of the Trust increased by 12.1 million to 1,248.2 million. The NAV per unit increased during the same 12 month period from to 32.69, a rise of 2.1%. The Trust outperformed its benchmark over the year to 31 March 2012 generating total returns of 6.4% versus the benchmark at 5.5%. This is the second year the Trust has outperformed its benchmark, although it remains behind over the three year period. Units in Issue and Secondary Market As at 31 March 2012 the Trust had a total of 38,185,964 units in issue, a decrease of 1.1% (431,574) over the 12 months. During the period under review 528,340 units were redeemed, predominantly between April to June 2011, while new unit subscriptions amounted to 96,766 units and were mainly issued from January to March On the secondary market units valued at 50.7 million were traded between investors over the 12 month period. This represents 4.2% of the units in issue at the end of the period under review. Investment and Borrowing Guidelines The Supervisory Board is responsible for ensuring that the Manager operates within the agreed investment and borrowing guidelines. The guidelines have been set in order to protect the interests of unitholders and are reviewed on a regular basis. The guidelines were monitored and I am pleased to report that they were maintained to the Board s satisfaction during the period under review. The Manager would be pleased to provide details of the guidelines to unitholders on request. Gearing In 2009 the Manager articulated a strategy of repositioning the portfolio which included reducing the level of gearing. As at 31 March 2009 gearing in the Trust stood at 20.6% NAV, but this has now been reduced to 6.1% NAV and is entirely held within the indirect investments. Conversion to a Property Authorised Investment Fund For over 40 years SEPUT has provided UK pension funds and charities with access to a diversified portfolio of UK property. In the coming months unitholders will be asked to consider the conversion of SEPUT from an unauthorised unit trust into a Property Authorised Investment Fund ( PAIF ). A PAIF is a new type of property fund which was introduced by the UK government in PAIFs are authorised by the FSA, unlike SEPUT, and importantly are tax efficient for UK pension funds, charities and other investors. Although PAIFs can be available to both retail and institutional investors, SEPUT will remain only available to professional investors. The conversion of SEPUT to a PAIF is a major project, the cost of which Schroders will fund. The Financial Services Authority has given approval in principle for the conversion, and the Supervisory Board has also endorsed it. The conversion will now be up to unitholders to decide and this will take place at an Extraordinary General Meeting ( EGM ) where unitholders will be asked to vote on the proposal. This is expected to take place on 16 July Subject to approval, SEPUT would then convert into a new fund called Schroder UK Property Fund. As a regulated fund, the governance arrangements will differ from those for SEPUT, and there will be no provision for the Supervisory Board. However, the converted fund will continue to be managed by the same team at Schroders using the same investment strategy SEPUT has adopted over the past three years which has delivered the recent outperformance. Governance The Supervisory Board is satisfied that the Trust has been managed in accordance with the Trust Deed and agreed guidelines and with due regard to sound governance practice. Andrew Sykes resigned from the Supervisory Board in October 2011 due to the appointment of Schroders as the Investment Manager of a real estate investment trust which Mr Sykes chairs. Due to the anticipated conversion of SEPUT to a PAIF in July 2012, it will not be necessary to hold the SEPUT Annual General Meeting ( AGM ). Therefore this will probably be my last annual report to unitholders as Chairman of the Supervisory Board and I would like to thank my fellow Board members for their contribution to the good governance of the fund. Should the Trust not convert to a PAIF, unitholders will be alerted and the usual SEPUT AGM will be called at a later date. Outlook The Supervisory Board remains supportive of the management team and the strategy for the Trust. We are pleased that we have overseen the repositioning strategy of the Trust articulated in This is now complete and the majority of SEPUT is invested in good quality direct real estate which is better placed to withstand any further market turbulence. While challenges remain in the UK market, the investment team are well placed to take advantage of opportunities both within the existing portfolio and in the wider property market. They will continue to be cautious in their approach, ensuring the portfolio is focused on secure and good quality income producing assets for the benefit of the Trust s unitholders. James A. Scott Chairman Schroder Exempt Property Unit Trust Supervisory Board 25 June

8 Manager s Statement Performance Over the one and two year periods to 31 March 2012, the Trust outperformed its benchmark. Over the three year period to 31 March 2012 it remains behind the benchmark, but its relative performance has materially improved since this time a year ago. The main contributors to performance relative to the benchmark over the past 12 months were as follows: Asset allocation. The overweight position to central London offices at the expense of other sectors has been an important driver. This includes the indirect investment in West End of London Property Unit Trust (WELPUT 1 ), which has produced above benchmark returns. Acquisitions that have benefited from uplifts in valuation. This includes the purchase and development of the pre-let Building 8 in Chiswick Park. The development was completed on schedule and the tenant, QVC Ltd, is now in occupation. It is let on a 21 year lease with fixed uplifts and has performed well in excess of expectations. Rents in Chiswick Park have continued to grow since we acquired the property, which may enhance future performance. Active asset management strategies that have helped improve rents and in turn valuations. An example of this strategy in action is the floor by floor refurbishment of the multi let office building in Kensington Village, West London. Estimated rental values have grown from around to per square foot over the 12 month period under review. Profitable sales of non core assets. In Q4 2012, the Moorgate EC2 and Mark Lane EC3 office development sites in the City of London were sold at a premium to their prior valuation. This benefited performance, as well as reducing risk in the portfolio. Not surprisingly, land and potential regeneration schemes such as Bracknell town centre and Croydon have underperformed the rest of the portfolio. However, the recent opening of Waitrose in Bracknell and other similar plans with retailers are expected to improve total returns into the market recovery. Despite significantly reducing exposure to indirect retail warehouses in the past three years, the high level of gearing and low distribution yields which have been a feature of these funds has also detracted from relative performance. SEPUT will seek to further reduce its exposure to these holdings, but only when opportune to do so. UK Property Market Review and Outlook The past year has proven challenging for the high street and this became evident in late 2011 and early 2012 with established retailers like GAME and Peacocks going into administration. Their failures are symptomatic of some of the difficulties facing the high street. The former lost market share to the internet while the latter was undermined by high debt financing costs. These issues were highlighted in the government sponsored review carried out by Mary Portas in December Profitable retailers, too, are reviewing their property strategy and many, such as Arcadia Group and Mothercare, are seeking to reduce their high street presence as they move to a multi-channel (i.e. shops and internet) approach. Elsewhere, the City office market started to cool from mid-2011 onwards, with large occupiers choosing to wait and see rather than commit to space. Most provincial office markets remain subdued although there have been some pockets of growth that have defied the wider malaise. These include media and technology clusters such as Cambridge, Soho W1 and Old Street N1 in London, all of which have benefited from the growth of the IT and creative sectors. The property investment market is dominated by two overriding themes. The first is the continued importance of foreign capital which is particularly evident in the Central London office market where cross border flows accounted for 62% of all transactions in London in 2011 (source: Real Capital Analytics). Another persistent feature of the investment market is the widening of the yield gap between prime and secondary property as the majority of investors focus on prime properties with long income streams. Whilst the number of banks actively lending to commercial property has not completely dried up, terms remain prohibitive on all but the best stock and in the short term this may exacerbate the prime/secondary divide. More encouragingly we are seeing the emergence of some insurance companies as providers of debt as an alternative to banks. Strategy The following considerations have been taken into account when forming our short to medium term strategy: The polarisation in values of prime and secondary property continues to be a feature of the market. With a number of investors focusing on the very narrow prime end of the market, we believe opportunities may exist in some good secondary properties. These properties typically offer good property fundamentals in a good location, where growth can still be achieved by improving the quality of the income stream or the asset itself. The difference between prime and good secondary, therefore tends to be the length of lease. Prime yields may actually present more risk and may be more vulnerable to any increase in long dated gilt yields, particularly where investors compromise on the quality of the bricks and mortar. Given the weak growth prospects, we continue to take a defensive stance and favour those parts of the market where rents are affordable and which offer a higher income return. Long let properties to supermarkets are available at typical yields of 4.5%, but niche properties such as select car showrooms, healthcare and leisure, where rents are often also indexed to inflation, may offer better value. To continue to deliver performance, some key objectives over the next 12 months include: Income ensure SEPUT has a diversified, secure and good quality income stream. With income expected to be the main driver of property returns over the coming years, this will be important for providing consistent returns from year to year. Stock selection we will continue to target acquisitions where we believe the property offers a good location and the right specification for modern occupiers, where growth can still be achieved either from a fixed or RPI-linked rental profile, or by improving the quality of the income stream, or the asset itself can be improved. Active asset management in a weak market environment it is essential to keep void rates low and execute initiatives to protect and enhance cashflows. The manager continues to work closely with tenants to achieve this and the Trust s vacancy rate remains below the benchmark. 1 Schroder s in house fund 06 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

9 Portfolio activity During the period under review a number of direct properties have been acquired with the purpose of securing high yielding longer income streams. The Trust has also sought to reduce specific stock and development risk by selectively reducing exposure to development sites. Purchases Reading, Davidson House, Forbury Square A prime, 125,600 sq ft office building centrally located in Reading was acquired for 42.9 million producing 2.9 million of contracted rent from eight tenants equating to a 6.45% net initial yield. The property benefits from a weighted average lease term, including breaks, of almost seven years. Its largest tenant Regus, who occupy almost 40% of the space, pay a rent significantly below the estimated market rent for the location. This provides a potential upside should Regus vacate the property. However, given the mutual break in their lease is not until 2018, this is likely to be a longer term driver of value if re-let at higher rents. In the meantime, the income return from this core property is very attractive. Motor Retail Investment Limited Partnership The Motor Retail Investment Limited Partnership was acquired in a joint venture with Schroder Property s Multi-manager team. Initially it comprises 12 car showrooms across the UK. SEPUT has committed 25 million to the Partnership of which 17.5 million was used for this acquisition. The portfolio has a net initial yield of over 7% and benefits from 19 years unexpired lease term let to Pendragon. The majority of leases are linked to capped annual RPI uplifts. While a non-traditional retail asset, it has a high initial yield with a long income stream, in line with the Trust s strategy. In analysing the opportunity a specialist advisor was appointed. Considerable due diligence was undertaken with Schroders in-house equities team on the car manufacturers operating models and on Pendragon. This helped us to assess both the different manufacturers needs for the individual showrooms and the franchisee s covenant strength. Schroder Emerging Retail Property Unit Trust (SERPUT) We completed the purchase of SERPUT which effectively brings 10 high street shopping parades with an initial yield of around 7.0% under SEPUT s control. The portfolio targets convenience retail locations across the UK with expanding demographics and proved to be a defensive exposure to the struggling retail sector over the last 12 months. Colchester, Turner Rise Retail Park A modern, well configured retail park in Colchester was acquired from a distressed fund for 16.5 million. It comprises eight fully let units adjacent to an Asda supermarket (not included in the acquisition). It has 12 years weighted average unexpired lease term to next break. The rents are around per sq ft which are relatively modest compared to historic levels in Colchester. Several new lettings took place immediately prior to completion of the purchase, to strong and popular retailers such as Home Bargains. It is felt that the prospects for future rental growth are good, in addition to the yield of over 8% from the income that is already contracted. The sale price was conditional on a quick completion and SEPUT s investment team were able to capitalise on their ability to execute the transaction in a matter of days. Croydon, Dingwall Road Car Park A multi storey car park adjacent to the Ruskin Square development was acquired for 3.5 million. Acquiring this car park facilitates a more cost efficient way of providing parking to the proposed Croydon Gateway development scheme. In the meantime, the car park is let to NCP until 2015 and provides a steady income stream. The location will be strengthened once the new passenger bridge link to the revamped East Croydon station is opened in London N1, Shepherdess Walk Two adjoining office buildings totalling 85,000 sq ft were acquired from the same distressed vendor as Turner Rise Retail Park, Colchester. The purchase price was 18.5 million which reflects a 9.5% net initial yield. The property offers an attractive income return and is located in the emerging technology hub near Old Street in London, colloquially known as Silicon Roundabout. The offices are let to two tenants with an average unexpired lease term of 3.25 years. While this is shorter then we would typically seek, the strategy for this property is to seek income security either by refurbishing and reletting the space or renewing existing leases. The purchase price allows for a significant refurbishment of the building (to meet modern standards and the Trust s requirements for energy efficiency and low carbon emissions) without the need to assume growth beyond current rental levels which are less than 30 per sq ft for a refurbished building. Kingston Upon Thames, Clarence Street A freehold parade of five shops was acquired in the affluent London suburb of Kingston upon Thames for 4.1 million (8.0% net initial yield). It is fully let at rental levels which are slightly below market, with a weighted 7.8 years unexpired lease term to the next break. The location is popular with retailers thanks to its close proximity to the station generating passing trade. The acquisition complements our investment strategy by targeting convenience retail locations throughout the UK. Unit Trust Swap Hercules Unit Trust 2 and Henderson UK Retail Warehouse Fund In 2011 the Trust swapped approximately 11.8 million of units in Hercules Unit Trust for units in the Henderson UK Retail Warehouse Fund effectively at a like for like unit price. The swap reduces stock specific risk and both of these indirect retail warehouse holdings are now similar sizes (2.4% and 2.6% NAV, respectively). While both funds have similar property fundamentals, Henderson has a higher distribution yield of 3.7% compared to 2.6% from the Hercules Unit Trust. This yield advantage has contributed to its outperformance. Unit trusts divestments Gresham Property Partners, L.P. Following the winding up of the fund after its remaining assets were sold in 2009, a final distribution of 1.4 million was paid to SEPUT. Hercules Unit Trust Convertible Bond The 9.5 million investment in Hercules Unit Trust (HUT) Convertible Bond was redeemed at par. SEPUT chose not to exercise the option to convert the holding into HUT units. Sales Cardiff, Cardiff Bay Retail Park In July 2011, a retail park which the Trust owned since 1998 in a joint venture with Equitable Life was sold for 54.5 million (6.25% net initial yield on the purchase price). SEPUT s interest represented million. The sale price reflected a premium to its prior valuation and allowed SEPUT to crystallise the property s anticipated future performance. London, Moorgate EC2 and Mark Lane EC3 Moorgate and Mark Lane, two speculative office development sites in the City of London, 2 Schroder s in house fund 07

10 Manager s Statement (continued) were sold for 28.6 million and 19.5 million, respectively. Both disposal prices were ahead of their prior valuations. The disposals reduce SEPUT s exposure to non income producing land sites from 7.4% to 3.5% of net asset value and SEPUT no longer has any development sites in the City of London. This is in line with the Trust s strategy to reduce non income producing assets. Change of Trustee As part of a group restructure, RBS Group Plc has decided to move its trustee and depositary services from RBS Plc to the National Westminster Bank Plc. Both entities sit within the RBS Group Plc. Notwithstanding the change of operating entity, SEPUT should not experience any difference in the services previously offered and the team, structure and reporting lines will remain the same. The effective date of the change of trustee to NatWest Plc was 31 March 2012 and was effected by the trustee, manager and Supervisory Board entering into a supplemental Retirement and Appointment of Trustee Deed. Summary As evidenced by its recent outperformance over the one and two year periods, we believe the Trust is on track to achieve its target outperformance over the three year period. Given the weak market prospects, we continue to take a defensive stance and favour those parts of the market where rents are affordable and which offer a high income return such as the recent acquisition of Shepherdess Walk in London. Our preferred sectors include South East offices and industrials and niche property types such as car showrooms, healthcare and leisure where rents are often indexed to inflation. We also favour convenience retail in affluent areas, where rents are at levels which retailers can more readily afford. Given SEPUT has cash in excess of 50 million, it is in a good position to continue to take advantage of opportunities in the property investment market. The Fund is now well positioned to meet the needs of its investors seeking to gain the benefits of a 1.2 billion property portfolio. If unitholders resolve to convert SEPUT to a Property Authorised Investment Fund (PAIF), new types of professional investors will also be able to invest in the Fund for the first time providing the Trust with a more diverse investor base. I D Mason Fund Manager 25 June Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

11 Rent Reviews, Lettings and Lease Renewals During the year ended 31 March 2012 Rent Reviews In the directly held portfolio 13 rent reviews were settled over the year, adding an additional 237,873 to rental income per annum. This reflects an uplift of 15.6% on the old rent and was 9.4% above the estimated rental value (ERV) defined as being the Trust s valuer s opinion as to the open market rent which, on the date of valuation, could be reasonably expected to be obtained on a new letting or rent review of the property (Source: Schroders, 31 March 2012). Notable rent reviews Old Rent New Rent ERV Property Tenant (per annum) (per annum) (per annum) York, Monks Cross AG Clothing Ltd 141, , ,200 Cardiff, Mermaid Quay Nando s Chickenland Ltd 61,000 75,000 68,100 Cardiff, Mermaid Quay SA Brain & Co Ltd 223, , ,300 Source: Schroders, 31 March 2012 New Lettings In the directly held portfolio 40 new lettings were completed adding 5.9 million per annum to the rent roll (Source: Schroders, 31 March 2012). Notable new lettings Old Rent New Rent ERV Property Tenant (per annum) (per annum) (per annum) Frimley, Albany Park Matalan Retail Ltd n/a 640, ,134 London W14, Kensington Village Universal Music Operations Ltd n/a 439, ,900 Dunstable, Arenson Centre Sika Ltd n/a 101,535 67,700 Source: Schroders, 31 March 2012 Lease Renewals In the directly held portfolio 18 leases were renewed totalling 1.0 million per annum, approximately 9.4% above estimated rental values (Source: Schroders, 31 March 2012). 09

12 Purchases and Sales During the year ended 31 March 2012 Purchases Name Sector Type Transaction Lot size Reading, Davidson House Rest of UK Office Direct Over 25m Motor Retail Investment Limited Partnership Standard JV Retail Direct Between 10m and 25m Henderson UK Retail Warehouse Fund (Unit Trust Swap) Retail Warehouse Indirect Between 10m and 25m Colchester, Turner Rise Retail Warehouse Direct Between 10m and 25m London N1, Shepherdess Walk Central London Office Direct Between 10m and 25m Croydon, Gateway Car Park Other Direct Under 5m Schroder Emerging Retail Property Unit Trust (SERPUT) (Completed Purchase) Standard Retail Direct Under 5m Kingston Upon Thames, 167/181 Clarence Street Standard Retail Direct Under 5m Total Acquisition Price 96.8 million Sales Name Sector Type Transaction Lot size Cardiff, Cardiff Bay Retail Park Retail Warehouse JV Over 25m London EC2, Moorgate Central London Office Direct Over 25m Hercules Unit Trust (Unit Trust Swap) Retail Warehouse Indirect Between 10m and 25m London EC3, Mark Lane Central London Office Direct Between 10m and 25m Hercules Unit Trust Convertible Bond Retail Warehouse Indirect Under 10m Gresham Property Partners L.P. Industrial Indirect Under 5m Total Sale Price Source: Schroders, 31 March million 10 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

13 Portfolio Details At 31 March 2012 Portfolio Holdings Name Lot size Type Standard Retail Exeter High Street Between 10m and 25m Direct Loughton High Road Between 10m and 25m Direct Southsea 2-42 Palmerston Road Between 10m and 25m Direct Bristol Maggs House Between 5m and 10m Direct Dunfermline Duloch Park District Centre Between 5m and 10m Direct Shipley Market Square Between 5m and 10m Direct Stanmore Buckingham House, The Broadway Between 5m and 10m Direct Woodley Crockhamwell Road Between 5m and 10m Direct Birmingham High Street, Harborne Under 5m Direct Enfield London Road Under 5m Direct Kingston Upon Thames 167/181 Clarence Street Under 5m Direct London SW Upper Richmond Road, East Sheen Under 5m Direct Retail Warehouse Henderson UK Retail Warehouse Fund (HRWF) Over 25m Indirect Norwich Hall Road Retail Park Over 25m Direct The Hercules Unit Trust (HUT) Over 25m Indirect York Monks Cross Over 25m JV Colchester Hythe Riverside Park Between 10m and 25m Direct Colchester Turner Rise Between 10m and 25m Direct Ipswich Interchange Retail Park Between 10m and 25m Direct Retail and Office Bracknell Over 25m JV Central London Offices London SE1 Palace House Over 25m Direct London W14 Kensington Village Over 25m Direct London WC2 Parker Tower Over 25m Direct West End of London Property Unit Trust (WELPUT) Over 25m Indirect London EC1 4-7 Chiswell Street Between 10m and 25m Direct London EC2 11/12 Appold Street Between 10m and 25m Direct London EC3 Lombard Street Between 10m and 25m Direct London N1 Shepherdess Walk Between 10m and 25m Direct London W Dean Street Between 10m and 25m Direct Austral House Unit Trust (AHUT) Under 5m Indirect Basinghall Street Unit Trust (BSUT) Under 5m Indirect City of London Office Unit Trust (CLOUT) Under 5m Indirect 11

14 Portfolio Details (continued) Name Lot size Type Rest of UK Offices Cardiff St William House Over 25m Direct Croydon Gateway Site Over 25m Direct London W4 Building 8, Chiswick Park Over 25m Direct Manchester Fujitsu, Central Park Over 25m Direct Reading Davidson House Over 25m Direct Bracknell Bracknell Beeches Between 10m and 25m Direct Croydon AMP House Between 10m and 25m Direct Reading New Century Place Between 5m and 10m Direct Slough Capital Point, 33 Bath Road Between 5m and 10m Direct Cranford Europa House, Bath Road Under 5m Direct Industrial Crayford Acorn Industrial Estate Over 25m Direct Hackbridge Felnex Trading Estate Over 25m Direct London E16 Electra, Canning Town Over 25m Direct London NW10, Matrix, Park Royal Over 25m Direct Dunstable Chiltern Park Between 10m and 25m Direct Frimley Albany Park Between 10m and 25m Direct London UB6 Greenford Between 10m and 25m Direct Woking Woking Business Park Between 10m and 25m Direct Birmingham Deykin Avenue Between 5m and 10m Direct Dunstable Arenson Centre Between 5m and 10m Direct Welwyn Garden City Quadrant Park Between 5m and 10m Direct Cannock Walkmill Lane, land site Under 5m Direct Livingston Limefields, 2nd land site Under 5m Direct Livingston Limefields, land site Under 5m Direct London UB6 Greenford, land site Under 5m Direct Sutton Kimpton Industrial Estate Under 5m JV York Alexandra Court, James Street Under 5m Direct Other Cardiff Mermaid Quay Over 25m Direct London E14 West India Quay Over 25m JV Motor Retail LP Between 10m and 25m JV UNITE UK Student Accommodation Fund Between 10m and 25m Indirect Hartlepool Jacksons Landing, land site Under 5m Direct 12 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

15 Responsibilities of the Manager, Trustee and Supervisory Board Manager s and Trustee s Responsibilities for the Financial Statements The Trust Deed requires the Manager to prepare Financial Statements for each financial year detailing the state of affairs of the Trust as at the end of the financial year and its income or loss for the financial year. The Manager is responsible for keeping proper accounting records and, along with the Property Manager, for taking reasonable steps to safeguard the assets of the Trust and to prevent and detect fraud and other irregularities. The Trustee is required to hold the underlying property of the Trust for the unitholders and is responsible for the safe custody of that property and any documentation relating to it. Supervisory Board s Responsibilities for the Financial Statements The Supervisory Board is responsible for approving, on the Audit Committee s recommendation, the Financial Statements prepared for each financial year and half year, including the content and the accounting policies adopted, and for reporting any corporate governance issues relating to the Trust or other matters in connection with the Financial Statements. The Manager confirms that suitable accounting policies and appropriate accounting standards have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the Financial Statements. The Manager intends to liquidate the Trust and transfer all assets and liabilities into a newly formed authorised Open Ended Investment Company (OEIC), Schroder UK Property Fund. Therefore the Manager does not consider the Trust to be a going concern. 13

16 Independent Valuer s Report To the Unitholders of Schroder Exempt Property Unit Trust As independent valuer for the Trust, we have valued properties held by the Trust at 31 March 2012 in accordance with The Royal Institution of Chartered Surveyors and International Valuation Standards (RICS). The Manager has been provided with a full valuation certificate and report. The properties have been valued on the basis of Market Value as defined by the RICS Valuation Standards subject to existing leases. Details of the nature and extent of the properties, the tenure and tenancies, permitted uses, town planning consents and related matters, have been supplied by the Property Manager, Schroder Property Investment Management Limited (SPrIM). The majority of the properties form the subject of detailed reports from ourselves. We have seen copies of all the leases but we have not examined the title documents and we have therefore assumed that the Trust s interests are not subject to any onerous restrictions, to the payment of any unusual outgoings or to any charges, easements or rights of way, other than those to which we have referred in our reports. We rely upon the Property Manager to keep us advised of any changes that may occur in the investments. We are not instructed to carry out structural surveys nor test any of the service installations. Our valuations therefore have regard only to the general condition of the properties evident from our inspections. We have assumed that no materials have been used in the buildings which are deleterious, hazardous or likely to cause structural defects. We are not instructed to carry out investigations into pollution hazards which might affect the properties and our valuations assume the properties are not adversely affected by any form of pollution. In our opinion the aggregate of the market values of the 41 properties owned by the Trust at 31 March 2012 is million. This figure represents the aggregate of the values attributable to the individual properties and should not be regarded as a valuation of the portfolio as a whole in the context of a sale as a single lot. In the case of the properties in the course of development, our valuations reflect the stage reached in construction and the costs already incurred at the date of valuation. We have had regard to the contractual liabilities of the parties involved in the developments and any cost estimates which have been prepared by professional advisers. No allowance is made in our valuations for the costs of realisation, any liability for tax which might arise on the event of disposal or for any mortgage or similar financial encumbrance over the property. Our valuations exclude VAT. BNP Paribas Real Estate 31 March Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

17 Independent Auditor s Report To the Unitholders of Schroder Exempt Property Unit Trust We have audited the financial statements of the Schroder Exempt Property Unit Trust ( the Trust ) for the year ended 31 March 2012 which comprise the Unit Trust Statement of Net Assets, the Income and Expenditure Account, the Statement of Total Recognised Gains and Losses, the Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective responsibilities of the Manager, Trustees and Auditors As explained more fully in the Manager s Responsibilities Statement, the Manager is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinion, has been prepared for and only for the unitholders of the Trust as a body in accordance with the Trust Deed and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Trust s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Manager; and the overall presentation of the financial statements. In addition, we read all the financial and nonfinancial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion In our opinion the financial statements: give a true and fair view of the financial position of the Trust as at 31 March 2012 and of the net income, the total recognised gains, and cash flows for the year then ended; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice and the Trust Deed. Basis of preparation Without modifying our opinion, we draw attention to note 1 to the financial statements which discloses the basis of preparation and explains that the Manager intends to liquidate the Trust and transfer all assets and liabilities into a newly formed authorised Open Ended Investment Company (OEIC) as stated in note 1 of the accounts. PricewaterhouseCoopers LLP Chartered Accountants London 25 June

18 Financial Statements 31 MARCH Statement of Net Assets Income and Expenditure Account Statement of Total Recognised Gains and Losses Cash Flow Statement Notes to the Financial Statements 16 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

19 Statement of Net Assets At 31 March Notes Fixed assets Investment Property 2(a) 602,328 Development property 2(b) 39,800 Investment in subordinated convertible notes 3 9,462 Property related Investments 4 457,801 Total fixed assets 1,109,391 Current assets Investment Property 2(a) 722,054 Development property 2(b) 11,680 Property related investments 4 462,718 Debtors 5 36,299 23,995 Cash at bank and on deposit 14 52, ,655 Total current assets 1,285, ,650 Total assets 1,285,629 1,267,041 Current liabilities Creditors 6 27,607 19,861 Taxation 6,395 6,920 Distributions payable 3,403 4,134 Total current liabilities 37,405 30,915 Net assets attributable to unitholders 8 1,248,224 1,236,126 Net asset value per unit The Financial Statements on pages 17 to 33 were approved by the Manager, Schroder Property Investment Management Limited, and the Supervisory Board on 25 June 2012 and signed on their behalf by: W A Hill, Director On behalf of the Manager J A Scott, Chairman On behalf of the Supervisory Board The notes on pages 21 to 33 form part of these Financial Statements. The Independent Valuer s Report is shown on page 14. The Independent Auditor s Report is shown on page

20 Income and Expenditure Account For the year ended 31 March Notes Rents receivable 1(f) 39,362 38,392 Other income 1(f) Service charge income 5,685 5,641 Less: property expenses 9 10,778 9,241 Net rental income 34,319 34,874 Income from property related investments 19,156 20,901 Income from subordinated convertible notes Interest receivable on bank deposits 1(i) Less: finance costs: interest payable 143 Net interest income Net income before tax 54,705 57,381 Less: income tax 11 10,941 11,476 Net income after tax 43,764 45,905 Less: Management expenses Supervisory Board remuneration Trustee fee Management fees 16 6,780 6,331 Valuation fee Audit fee Printing and stationery Legal and professional fees and other charges Total management expenses 7,773 7,244 Net income available for distribution 35,991 38,661 Finance costs: distributions 10(a) (39,381) (41,479) Retained deficit for the year (3,390) (2,818) There is no difference between the net income available for distribution as stated above and its historical cost equivalent. All items dealt with in arriving at the net income available for distribution relate to continuing operations. The notes on pages 21 to 33 form part of these Financial Statements. The Independent Valuer s Report is shown on page 14. The Independent Auditor s Report is shown on page Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

21 Statement of Total Recognised Gains and Losses For the year ended 31 March Notes Realised profit/(loss) on: Investment property sold 12 2,545 9,305 Property related investments sold 12 4,358 32,063 Property equities 12 (410) Movement in revaluation reserve for retained: Investment property 12 24,939 18,853 Sites in the course of development 12 (4,004) 5,538 Property related investments ,563 Capital surplus for the year 28,837 67,912 Net income available for distribution 35,982 38,661 Total recognised gains 64, ,573 The notes on pages 21 to 33 form part of these Financial Statements. The Independent Valuer s Report is shown on page 14. The Independent Auditor s Report is shown on page

22 Cash Flow Statement For the year ended 31 March Notes Net cash inflow from operating activities 13 41,938 44,212 Returns on investment and servicing of finance Interest received Interest paid (143) Distributions paid (40,102) (39,998) (39,685) (39,355) Tax paid (10,083) (10,835) Capital expenditure and financial investment Sale of investment property: Freehold 27,250 40,429 Purchase of investment property: Freehold (86,447) (34,312) Purchase of development property: Freehold (6,985) Property related investments: Purchases (48,105) (40,936) Sales 48, ,541 Property equities: Sales 6,071 Subordinated convertible notes: Redeemed 9,462 Other capital expenditure (9,961) (18,747) (59,598) 69,061 Cash (outflow)/inflow before financing (67,428) 63,083 Financing Issue of units 8 3,312 19,657 Units redeemed 8 (16,661) (431) (13,349) 19,226 (Decrease)/Increase in cash 14 (80,777) 82,309 The notes on pages 21 to 33 form part of these Financial Statements. The Independent Valuer s Report is shown on page 14. The Independent Auditor s Report is shown on page Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2012

23 Notes to the Financial Statements 1. Accounting policies The Financial Statements have been prepared in accordance with the historical cost convention, as modified by the revaluation of property assets and property related investments, as explained in notes 1(a) and 1(c) below, and in accordance with applicable United Kingdom Accounting Standards and the Trust Deed. In accordance with Financial Reporting Standard (FRS) 18, the Trust s accounting policies are reviewed annually to confirm that they remain appropriate and are in accordance with the requirements of Accounting Standards, Urgent Issues Task Force (UITF) abstracts and the Trust Deed. The Manager intends to liquidate the Trust and transfer all assets and liabilities into a newly formed authorised Open Ended Investment Company (OEIC), called Schroder UK Property Fund. Therefore the Manager, in agreement with the Supervisory Board, does not consider the Trust to be a going concern. In preparing the financial statements the Manager has considered whether adjustments to balances are necessary in order to reflect this intention. In accordance with The Unitholder Proposal document for Schroder UK Property Fund, the assets and liabilities of the Trust will be transferred at net book value to Schroder UK Property Fund and any costs incurred will be borne by The Manager, therefore the carrying values in the financial statements at 31 March 2012 are unchanged and as they would be if the entity were a going concern. The Manager intends to seek unitholder approval for the conversion of the Trust at an EGM on 16 July The principal accounting policies adopted in these Financial Statements, which have been applied consistently, are: (a) Properties owned by the Trust, including investments in properties owned through partnerships and trusts for land, are independently valued on a market value basis having regard to whether they are let or unlet at the date of valuation. Development properties in the course of development are independently valued having regard to the stage reached in the construction and taking account of any agreed letting and of any contractual liabilities to advance further monies. Where legal completion of a purchase is not fully executed at the date of the Statement of Net Assets, but takes place subsequently, or in the case of development properties purchased for development where no work has yet taken place, the property is shown at cost unless, in the opinion of the Manager, there may be a material difference between cost and valuation on completion. (b) Acquisitions and disposals of investment properties, property related investments and property equities are recognised where, by the end of the accounting period, there is a legally binding, unconditional and irrevocable contract. Investments in property equities are recognised on a trade date basis. (c) Property related investments are valued at the net asset value as provided by the relevant managers, in accordance with industry practice. (d) Unrealised surpluses less unrealised deficits on valuation of property fixed assets, property related investments and property equities are credited directly to the revaluation reserve in accordance with SSAP 19. Realised profits, less realised losses, determined by reference to carrying value at the commencement of the accounting period, are credited to the realised profit/loss on sale reserve and disclosed in the Statement of Total Recognised Gains and Losses. Realised prior period revaluations are taken to the realised profit/loss on sale reserve, as a reserve transfer. (e) In accordance with SSAP 19 no depreciation or amortisation is provided in respect of freehold properties or leasehold properties which have unexpired lease terms in excess of 20 years. (f) Rental income and other income are recognised in the Income and Expenditure Account on an accruals basis. Rental income includes the Manager s best estimates for unsettled rent reviews. Provisions are made where, in the opinion of the Manager, amounts are deemed likely to be irrecoverable. Income from property related investments comprises distributions receivable gross of any related tax withheld and is accounted for on a receivable basis. (g) Benefits to lessees in the form of rent free periods and other incentives are treated as a reduction in the overall return on the leases and, in accordance with UITF 28, Operating Lease Incentives, are recognised on a straight line basis over the shorter of the lease term or the period up to the initial rental review date. The valuation of investment property is reduced by all lease incentives. (h) In accordance with FRS 25, income distributions are classified as finance costs and are accounted for on an accruals basis. (i) Interest receivable and payable are accounted for on an accruals basis. (j) Where the Trust makes advances to developers by reference to the stage of completion reached on developments, interest on these advances is rolled up during the period of development and is paid to the Trust on completion. This interest is credited to the Income and Expenditure Account during the period of the development. (k) Fees are recognised on an accruals basis and are charged in full to the Income and Expenditure Account. The Manager has allocated 50% of the management fees to income and the remaining 50% to capital for the calculation of distributable income. (l) Income tax is provided for on income taxable in the period at the basic rate of income tax. Deferred tax is accounted for on an undiscounted basis at expected tax rates on all timing differences. A deferred tax asset is only recognised where it is more likely than not that the asset will be recoverable in the foreseeable future out of suitable taxable income from which the reversal of timing differences can be deducted. (m) Profits or losses that arise on disposal of units in any property related investments or equities are calculated on a First In, First Out basis (FIFO). (n) Investments in Subordinated Convertible Notes are held at cost until their conversion. 21